An investor purchased the following 3 bonds. Each bond had a par value of $1,000

ID: 2771302 • Letter: A

Question

An investor purchased the following 3 bonds. Each bond had a par value of $1,000 and an 8% yield to maturity on the purchase day. Immediately after the investor purchased them, interest rates fell and each then had a new YTM of 6%. What is the percentage change in price for each bond after the decline in interest rates? Fill in the following table. Round your answers to the nearest cent or to two decimal places.

Price @ 8% Price @ 6% Percentage Change 10-year, 10% annual coupon $ $ % 10-year zero $ $ % 5-year zero $ $ %

Explanation / Answer

(Annual interest*PVAF@8%,10year) +(Face value *PVF@8%,10year)

= (100*6.71008)+(1000*.46319)

=671.008 +463.19

=$ 1134.20

(Annual interest*PVAF@6%,10year) +(Face value *PVF@6%,10year)

=(100*7.36009)+(1000*.55839)

=736.01 + 558.39

=$ 1294.40

(1294.40-1134.20)/1134.20

=160.20 / 1134.20

=.1412 or 14.12%

(face value *PVF@8%,10year)

(1000 * .46319)

= 463.19

(face value *PVF@6%,10year)

(1000*.55839)

= 558.39

(558.39-463.19)/463.19

= 95.2 / 463.19

=.2055 or 20.55%

(face value *PVF@8%,5year)

=(1000 *.68058)

= 680.58

(face value *PVF@6%,5year)

=(1000*.74726)

=747.26

(747.26-680.58)/680.58

= 66.68/680.58

= .0980 or 9.80%

**No coupon payments under zero bond.

price @8% price@6% % change 10-year ,10%annual coupon